A report published by the British magazine "The Economist" says that the US Federal Reserve made a historical mistake regarding inflation, and what comes next will pave the way for the global economy.

He explained that the central banks are supposed to give confidence in the economy by keeping inflation low and stable.

America's Federal Reserve has suffered a terrible loss of control.

Last March, consumer prices were 8.5% higher than the previous year, the fastest annual rise since 1981. Now nearly a fifth of Americans say inflation is the most important problem in the country;

President Joe Biden released oil from strategic reserves in an effort to rein in gasoline prices;

Democrats are looking for villains to blame, from greedy presidents to Vladimir Putin.

However, it is the Federal Reserve that has the tools to halt inflation and has failed to use them in a timely manner, the report adds.

The result is the worst case of burnout in a large, rich economy in the 30-year era of central banks' inflation targeting.

The good news is that inflation may finally have peaked.

But the Fed's 2% target will remain elusive;

Which imposes painful choices on the central bank.

Advocates of US policy makers point to annual price hikes of 7.5% in the eurozone and 7% in Britain as evidence of a global problem, driven by higher commodity prices, especially since Russia's war on Ukraine.

Almost 3 quarters of inflation in the euro area is attributable to skyrocketing energy and food prices.

The Fed's 2% target will remain elusive, forcing painful choices on the central bank (Shutterstock)

high rates

The report said that America benefits from the abundance of shale gas, and its high incomes mean that basic materials have less impact on average prices, noting that if we exclude energy and food, inflation in the euro area will reach 3%, but in America it will reach 6.5%.

In addition, it is clear that the labor market in America, unlike Europe, is hyperactive, with wages growing at an average rate of about 6%.

And the recent drops in the prices of oil, used cars and freight may mean that inflation will decline in the coming months.

But it will remain very high, given the underlying upward pressure on prices.

The report went on to say that America was on a unique path due to Biden's excessive fiscal stimulus of $ 1.9 trillion, which was approved in March 2021.

He added extra oomph to an economy that was already recovering quickly after multiple rounds of spending, raising the total of pandemic stimulus to 25% of GDP, the highest in the rich world.

With the White House close to overheating, the Fed had to apply the brakes.

But he did not, and his reluctance stems in part from the difficulty of predicting the course of the economy during the pandemic, as well as from the tendency of policymakers to fight the recent war.

For most of the decade following the global financial crisis of 2007-2009, the economy stalled and monetary policy was very tight.

And in September 2020, the Fed wrote down its new views by promising not to raise interest rates at all until employment actually reached its maximum sustainable level.

His pledge ensured that he would fall far behind the curve.

He was welcomed by left-wing activists who wanted to bring equality to one of Washington's few functional institutions.

The result was a mess that the Fed is only now trying to clear up, predicting last December a slight 0.75 percentage point hike in interest rates this year.

Today, an increase of 2.5 points is expected.

Both policy makers and financial markets believe that this will be enough to stop inflation.

Perhaps they were too optimistic again.

The usual way to curb inflation is to raise interest rates above their neutral level - believed to be around 2-3% - more than by raising core inflation.

This refers to the fed funds rate of 5-6%, unseen since 2007.

Higher rates would tame price hikes, but by using artificial stagnation.

Over the past 60 years, the Federal Reserve has only succeeded on 3 occasions in slowing the US economy significantly without causing a deflation.

He never did and caused inflation to be as high as it is today.

Inflation is already helping the federal government reduce the real value of its debt (Shutterstock)

US deflation

The report says that the US downturn is hanging over the global economy as part of a triple threat, along with Europe's energy security and China's struggle to suppress Covid-19.

Poor and middle-income countries in particular have a lot to lose from sharply rising prices in the Federal Reserve, which will lure capital and weaken exchange rates, especially if the global downturn reduces demand for their exports at the same time.

The report wondered whether the Federal Reserve had the nerve to inflict such economic pain?

"Many economists advocate higher inflation, because long-term interest rates will rise side by side, pushing them away from zero, as it is difficult to bring interest rates below them in the event of a crisis," he said.

Inflation is already helping the federal government reduce the real value of its debt.

Around 2025, when the Fed reviews its policy-making framework, it will have the opportunity to raise the target.

There is nothing special about 2%, except for the fact that the Fed has promised to do so in the past.

My word is my knife

The report continued to show that stable and modest inflation above 2% may be acceptable for the real economy, but there is no guarantee that the Fed's stance today can achieve that.

Breaking promises has consequences.

This hurts long-term bond holders, including foreign central banks and governments that hold $4 trillion in Treasuries, the report adds.

Also, a decade of inflation that reached 4% instead of 2% would reduce the purchasing power of money paid at the end of that period by 18%.

And even if America breaks its promises about inflation in tough times, investors may fear that other central banks, many of which look at heavily indebted governments, will do the same.

In the 1980s, recessions caused by Paul Volcker's Federal Reserve Bank laid the foundations for inflation targeting regimes around the world.

And every month the inflation spikes sharply, and part of that hard-earned credibility is eroding.